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Global Financial Compliance > Chapter 1 - International Reg Environment > Flashcards

Chapter 1 - International Reg Environment Flashcards

1
Q

Rules Based Approach

A

High degree of prescriptive procedures including very detailed rules stipulating
what individuals and firms must do to ensure they comply. A rules-based approach requires a strict
adherence to precise rules with little allowance for interpretation. It is typically inflexible and may
result in a tick-box exercise.

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2
Q

Principles Based Approach

A

The focus is on principles and, therefore, the types of behaviour and outcomes,
not on blindly following the rules. Therefore, a principles-based approach acts as a fundamental
source of guidance on how firms and individuals are expected to act. How and to what extent the
principles are met is the responsibility of the individual and firm themselves.

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3
Q

What is Self-Regulation?

A

Self-regulation exists where groups or industries mutually agree the rules that will govern their own
collective behaviours. It exists in addition to any laws or regulations established by government or
instituted bodies

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4
Q

Examples of Self Regulation?

A
  • industry SROs
  • exchange self-regulatory frameworks, and
  • private associations.
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5
Q

What areas does Self Regulation focus on?

A
  • Oversight of the market itself
  • Qualification standards for market intermediation
  • Oversight of the business conduct of intermediaries, including their relationship with their client market-users
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6
Q

Key Elements of an SRO Model

A
  • Industry knowledge
  • Industry Motivation
  • Contractual Relationship
  • Transparency and Accountability
  • Flexibility
  • Coordination and Information Sharing
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7
Q

What is AAOIFI?

A

AAOIFI is an autonomous body responsible for the formulation and issuance of accountancy, auditing
ethics, governance and Shariah standards for the international Islamic banking and finance industry.

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8
Q

What is IFSB?

A

The IFSB is an international standard-setting organisation with a mission to promote and enhance the soundness and stability of the Islamic financial sector by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. Members of the IFSB are typically central banks in countries where Islamic financial institutions are incorporated.

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9
Q

What is the GDPR?

A

The EU General Data Protection Regulation (GDPR) was enforced on the 25 May 2018 and replaces
the Data Protection Directive. The GDPR is designed to harmonise data privacy laws across Europe to
protect EU citizens from privacy and data breaches in an increasingly data-driven world

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10
Q

What is the territorial scope of the GDPR?

A

It will apply to the processing of personal data by controllers and processors in the EU, regardless of whether the processing takes place in the EU or not.

The GDPR will also apply to the processing of personal data in the EU by a controller or processor not established in the EU, where the activities relate to: offering goods or services to EU citizens (irrespective of whether payment is required) and the monitoring of behaviour that takes place within the EU.

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11
Q

Penalties for GDPR Breach?

A

Up to 4% of the annual global turnover of the previous financial year or €20 million (whichever is greater)

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12
Q

Basic principle of consent under GDPR?

A

It must be as easy to withdraw consent as it is to give it.

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13
Q

What are the breach notification requiremnts under GDPR?

A

Mandatory in all member states where a data breach is likely to ‘result in a risk for the rights and freedoms of individuals’. This must be done within 72 hours of first
having become aware of the breach. Data processors will also be required to notify their customers, the
controllers, ‘without undue delay’ after first becoming aware of a data breach

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14
Q

What is the Right to Access under GDPR?

A

The right for data subjects to obtain from the data controller confirmation as to whether or not personal data concerning them is being processed, where and for what purpose

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15
Q

What is the Right to be Forgotten under GDPR?

A

Also known as ‘data erasure’, the right to be forgotten entitles the data subject to have the data controller erase their personal data, cease further dissemination of the data, and potentially have third parties halt processing of the data

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16
Q

What is Data Portability under GDPR?

A

The right for a data subject to receive the personal data concerning them and have the right to transmit that data to another controller.

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17
Q

What is Privacy by Design under GDPR?

A

Privacy by design calls for the inclusion of data protection from the onset of the designing of systems, rather than as an addition.
Article 23 calls for controllers to hold and process only the data absolutely necessary for the completion
of its duties (data minimisation), as well as limiting the access to personal data to those needing to act
out the processing

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18
Q

What is/was the Independent Commission on Banking (ICB)?

A

UK led review which resulted in recomendations to break up Retail and Investment Banks. Ended in 2011, implemented by 2019

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19
Q

What is the Dodd Frank Act?

A

US regulation deisgned to overhaul the banking system. Introduced new standards, new regulators. Increased transaprency of derivatives and added new consumer protection rules. Investment Advisors must now register with the SEC (previously not required)

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20
Q

What is MiFID2?

A

The updated form of MIFID (2007) introduced in 2018. Its key aim is to enhance consumer protections by establishing a general obligation for firms to act in a client’s best interest at all times. This includes:

  • obligation to obtain the best possible result for the client
  • information disclosure requirements
  • client-specific rules on suitability and appropriateness of financial products, and
  • rules on inducements.
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21
Q

How does Passporting work?

A

Obtaining authorisation in one EU state – the home state – enables a firm to provide investment services in
another EU member state – the host state – without requiring any further local authorisations), and ‘host state’ rules then no longer apply to incoming passported firms.

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22
Q

Which Services are covered by Passporting under MiFID?

A
  • receipt and transmission of orders in relation to one or more financial instruments
  • execution of orders on behalf of clients
  • dealing on own account
  • portfolio management
  • investment advice
  • underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
  • placing of financial instruments without a firm commitment basis
  • operation of multilateral trading facilities (MTFs).
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23
Q

Is MiFID 2 Mandatory?

A

The directives are binding on member states in terms of the result to be achieved but provide individual
countries with the flexibility to implement the rules in their own national legal systems as they see fit.

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24
Q

Who issued MAR and when?

A

UK FCA in July 2016

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25
Q

What does MAR apply to?

A

a. financial instruments admitted to trading on a regulated market or for which a request for
admission to trading on a regulated market has been made
b. financial instruments traded on an MTF, admitted to trading on an MTF, or for which a request for
admission to trading on an MTF has been made
c. financial instruments traded on an organised trading facility (OTF)
d. financial instruments not covered by points (a), (b) or (c), the price or value of which depends on or
has an effect on the price or value of a financial instrument referred to in those points, including,
but not limited to, credit default swaps and contracts for difference.

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26
Q

How does MAR impact Market Soundings?

A

MAR introduces a framework to make legitimate disclosures of inside information in the course of
market soundings.

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27
Q

What does MAR say regarding inside Information?

A

Inside information is information that would be likely to have a significant effect on the price of
financial instruments or issuers if it were to be made public. Persons who possess inside information are prohibited from using that information to (or attempt to) deal in financial instruments or to recommend or induce another person to transact on the basis of inside information.

Firms need to maintain a register of insiders. Issuers and emission allowance market participants
(EAMPs) need to publicly disclose any inside information which has been (in)directly made available to them as soon as possible.

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28
Q

Can you delay disclosure of Inside Information?

A

Disclosure may be delayed if it is in the interest of financial stability. The FCA needs to be informed immediately after the decision to delay the disclosure of inside information has been made. A firm does not have to provide a written explanation of how the conditions for delayed disclosure are met but will need to keep appropriate records which will have to be made available to the FCA on demand.

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29
Q

What activities are exempt from the regulations regarding Market Abuse under MAR?

A

Buy-back programmes and stabilisation measures. Firms will have to notify the FCA prior to undertaking these transactions.

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30
Q

What is Market Manipulation under MAR?

A

Market manipulation can take the following forms:
• false or misleading signals resulting from transactions, orders, trades, or any other behaviour
• using fictitious devices or other deceptions likely to affect the price
• false or misleading signals resulting from disseminating information
• collaboration to secure a dominant position over demand and supply, creating unfair trading
conditions, and other similar behaviours.

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31
Q

What market does EMIR address? (European Market Infrastructure Regulation)

A

Derivatives (particularly OTC Derivatives)

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32
Q

What are the central Obligations of EMIR?

A

• central clearing for certain classes of OTC derivatives
• application of risk mitigation techniques for non-centrally cleared OTC derivatives
• reporting to TRs
• application of organisational, conduct of business and prudential requirements for CCPs
• application of requirements for TRs, including the duty to make certain data available to the public
and relevant authorities.

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33
Q

How does PSD2 define Payment Services?

A

Services enabling cash to be deposited in or withdrawn from, for example, a bank account, as well as all the operations required to operate the account. This can include transfers of funds, direct debits, credit
transfers and card payments. Paper transactions are not covered by the directive

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34
Q

What is the aim of PSD2?

A

• provide the legal foundation for the further development of a better integrated internal market for
electronic payments within the EU
• put in place comprehensive rules for payment services, with the goal of making international
payments within the EU as easy, efficient, and secure as payments within a country
• open up payment markets to new entrants leading to enhanced competition, greater choice, and
better prices for consumers, and
• provide the necessary legal platform for the Single Euro Payments Area (SEPA).

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35
Q

Who does PSD2 apply to?

A

The PSD2 rules apply to existing and new providers of innovative payment services in the EU

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36
Q

What does PSD2 add for Consumer Rights?

A

PSD2 enhances consumer rights including reduced liability for non-authorised payment to €50 (from
€150), the unconditional right to refund direct debits in euros; and the removal of surcharges for the use
of a consumer debit or credit card.

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37
Q

What is the aim of the Sarbannes Oxley Act (SOX)?

A

The objective of SOX is ‘to protect investors by improving the accuracy and reliability of corporate
disclosures’. It applies to US public companies and their global subsidiaries. In addition, it applies to
foreign companies with shares listed on US stock exchanges.

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38
Q

What is primary implication of SOX?

A

One of the key sections is Section 404 which lays out the requirement for the management of a US public
company to report annually on the operational effectiveness of the company’s internal controls over
financial reporting. The company’s auditors must attest to and report on the management’s assertion
over the effectiveness of internal financial controls. This section significantly impacts the governance
and behaviour of any business with a US listing, including non-US companies, and their global
subsidiaries and joint ventures.

39
Q

What obligations does SOX place on the Managemnt of Firms?

A

• The chief executive officer (CEO) and chief finance officer (CFO) are responsible for ensuring that
internal controls and procedures can provide accurate financial disclosures.
• The controls must ensure that the CEO and CFO are aware of material information.
• Compliance work must be performed on a continual basis to document and attest to the
effectiveness of their internal controls.

40
Q

What other corporate governance issues are covered by SOX?

A

• measures to prevent conflicts of interest between securities analysts and investment banks
• the requirement for the CEO and CFO to certify the accuracy of the firm’s annual and quarterly SEC
reports; they are then personally responsible for the information
• all off-balance sheet transactions and material relationships must be disclosed
• the company must state whether it has adopted a code of ethics for its senior financial officers
• personal loans to officers or directors are forbidden
• greater protection is given for whistleblowers, and retaliation can be punishable with up to ten
years’ imprisonment.

41
Q

What is the only International anti-corruption agreement in existence?

A

The Organisation for Economic Co-operation and Development (OECD) Convention on Combating
Bribery of Foreign Public Officials in International Business Transactions was signed in 1997, and
reaffirmed in 2009. It establishes legally binding standards to criminalise the bribery of foreign public
officials in international business transactions and provides for a host of related measures to make it
effective.

42
Q

What is the UK’s implementation of the OECD Convention?

A

The UK Bribery Act 2010

43
Q

Which new offences were created by the Bribery Act of 2010?

A
  • offering or receiving a bribe (Section 1)
  • bribery of foreign public officials (Section 6), and
  • a failure to prevent a bribe being paid on an organisation’s behalf (Section 7).
44
Q

What is the Jurisdiction of the UK Bribery Act?

A

Section 12 of the Act provides that the courts will have jurisdiction over offences committed in the UK, as
well as offences committed outside the UK where the person committing them has a close connection
with the UK by virtue of being a British national or ordinarily resident in the UK, a body incorporated in
the UK, or a Scottish partnership.

In addition, in relation to Section 7 – failure to prevent a bribe – the jurisdiction of the UK courts is
extended to foreign commercial organisations. Only a ‘relevant commercial organisation’ can commit
an offence under Section 7 of the Bribery Act.

45
Q

What is the US’s Core Financial Crime Law?

A

Foreign Corrupt Practices Act (1977)

46
Q

What is the core of the FCPA?

A

The provisions of the FCPA make it unlawful for a US person, and certain foreign issuers of securities, to
make a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or
with, or directing business to, any person. The provisions also apply to foreign firms and persons who
take any act in the furtherance of such a corrupt payment while in the US.

47
Q

What is the purpose of FATCA?

A

FATCA, is an important development in US efforts to combat tax evasion by US persons holding investments in offshore accounts.

Under FATCA, US taxpayers holding financial assets outside the US are required toreport those assets to the Internal Revenue Service (IRS). In addition, FATCA requires foreign financial institutions (FFIs) to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.

48
Q

What is the jurisdiction of FATCA?

A

Firms outside the US are not directly subject to US legislation, and so a series of intergovernmental
agreements have been entered into so that the US authorities will receive the information they require
to improve tax compliance. UK FFIs will report directly to Her Majesty’s Revenue & Customs (HMRC)
certain information about the financial accounts held by US taxpayers, or by foreign entities in which US
taxpayers hold a substantial ownership interest. An FFI in a country not party to an intergovernmental
agreement is expected to register with the IRS.

49
Q

What is the standard jurisdiction of Recognised Investment exchanges?

A

Members of the exchange and listed securities, contracts or relevant financial instruments. Many stock exchanges have a national remit but increasingly as global markets develop they are becoming more
international in nature. Membership is often international, subject to the exchange rules and terms of membership.

50
Q

What is the standard jurisdiction of Government-appointed national regulatory bodies?

A

Broad jurisdiction which covers most financial markets, participants and products. Includes banking, insurance, and investment-related activities, both retail and wholesale.

51
Q

What is the standard jurisdiction of International regulatory authorities?

A

Regional jurisdiction covering a number of states with a broad coverage of banking, insurance and investment. Cross-border and international in
nature with extraterritorial reach. Establish principles of regulation and develop detailed rules.

52
Q

What is the standard jurisdiction of International regulatory organisations?

A

International focus, established to coordinate at the international level the work of national financial authorities and international standardsetting
bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies.

53
Q

What is the BiS?

A

Established in 1930, the Bank for International Settlements (BIS) serves as a central bank for central
banks, and fosters international monetary and financial cooperation. Its customers are central banks
and international organisations. The BIS does not accept deposits from, or provide financial services to,
private individuals or corporate entities. The BIS is headquartered in Basel, Switzerland.

54
Q

Does the BiS have any enforcement ability?

A

The regulatory guidelines produced by the BIS do not automatically have any force in national or
international law. Countries around the world that choose to implement them do so by making changes
to their own legal and regulatory processes.

55
Q

What is the International Banking Federation (IBFed)?

A

IBFed’s members are drawn from the banking associations of Australia, Canada, China, Europe, India,
Japan and the US. These countries represent 700 of the world’s top 1,000 banks, and every major financial
centre. Their global reach enables IBFed to function as the key international forum for addressing
legislative, regulatory and other issues of interest to the global banking industry.

56
Q

What is the Basel Committee on Banking Supervision (BCBS)?

A

The Basel Committee on Banking Supervision (BCBS) is part of the BIS and provides a forum for
international cooperation on bank regulation. It was established in 1974 and has 28 members, each of
which is represented by their central bank or the country’s authority responsible for banking supervision.

57
Q

What is the objective of the BCBS?

A

The BCBS’s objective is to enhance financial stability by improving supervisory know-how and the quality
of banking supervision worldwide. This is achieved by exchanging information on national supervisory
issues and techniques, with a view to promoting common understanding between national supervisors.

58
Q

What is the FSB?

A

The Financial Stability Board (FSB) has been established to coordinate at the international level, the
work of national financial authorities and international standard-setting bodies and to develop and
promote the implementation of effective regulatory, supervisory and other financial sector policies.

59
Q

What are the obligations of membership of the FSB?

A

As obligations of membership, members of the FSB commit to pursuing the maintenance of financial
stability, maintain the openness and transparency of the financial sector, implement international
financial standards (including the 12 key International Standards and Codes), and agree to undergo
periodic peer reviews, using among other evidence, IMF/World Bank Financial Sector Assessment
Program reports.

60
Q

What is IOSCO?

A

The IOSCO is an international association of securities regulators created in 1983 and, as of May 2019,
has 129 ordinary members. This category is open to a securities commission, or a similar government
or statutory regulatory body that has primary responsibility for securities regulation in its jurisdiction.

61
Q

What are the 3 objectives of securities regulation under IOSCO?

A
  • the protection of investors
  • ensuring that markets are fair, efficient and transparent
  • the reduction of systemic risk.
62
Q

What does IOSCO do?

A

Sets standards for the regulation of securities

63
Q

What is the European System of Financial Supervision (ESFS)?

A

The ESFS is the institutional architecture of the EU’s framework of financial supervision created in
response to the financial crisis. First proposed by the European Commission in 2010, it replaced three
existing Committees of Supervisors with three new authorities, the EBA, ESMA and the European
Insurance and Occupational Pensions Authority (EIOPA). To complement this framework, there is also a
European Systemic Risk Board (ESRB) under the responsibility of the European Central Bank.

64
Q

What are the 3 European Supervisory Authorities (ESAs) for Europe?

A
  • EBA
  • ESMA, and
  • EIOPA.
65
Q

What do the ESAs do?

A

The ESAs aim to create a single EU rulebook. They will do this by developing draft technical
standards, which will then be adopted by the European Commission as EU law. The ESAs will also
issue guidance and recommendations with which national supervisors and firms make every
effort to comply.

66
Q

What Powers do the ESAs have?

A

Where the ESAs believe that a national supervisory authority is failing to apply EU law, or is doing
so in a way which appears to be in breach of EU law, they have the power to investigate.

They can temporarily ban certain financial activities. Legislation will set out what they can ban
and in what circumstances. Where an emergency has been called by the Council, they have wideranging
powers to ban financial activities.

67
Q

What is the European Systemic Risk Board (ESRB)?

A

The new body with responsibility for the macroprudential oversight of the financial system within the EU. The operation of the board has, at least initially, been entrusted to the ECB.

68
Q

What is the SEC?

A

The US Securities and Exchange Commission (SEC), established in 1934, is an independent agency of
the US federal government. The SEC’s main responsibility is to enforce federal securities laws, propose securities rules, and to regulate the securities industry.

69
Q

What is the mission of the SEC?

A

The mission of the SEC is to protect investors; to
maintain fair, orderly, and efficient markets; and to facilitate capital formation. They strive to promote a
market environment worthy of the public’s trust.

70
Q

What is the primary method of implementation of regulations?

A

Licensing of Regulated Activities

71
Q

What is the Risk Based Approach to Regulation?

A

An approach which varies depending on a country or institution’s own assessment of the level of risk they face. Often used for AML or Terrorism Financing.

72
Q

Is the Risk Based Approach a Zero Failure approach?

A

No. There may be occasions where an institution
has taken all reasonable measures to identify and mitigate AML/CFT risks, but it is still used for ML or
TF purposes. It also does not exempt countries, competent authorities and financial institutions from
mitigating ML/TF risks where these risks are assessed as low.

73
Q

What is the Rules Based Approach to Regulation?

A

Generally, rules-based regulation is based on a set of detailed rules that govern firms’ behaviour. Such
rules enable firms to ‘tick the box’ to guarantee compliance with law.

74
Q

What is a Thematic Approach to Regulation?

A

A thematic approach allows the regulator to look at specific issues using a specialised team and helps it
focus its resources and information efficiently.

75
Q

What is the Principles Based Approach to Regulation?

A

The principles-based approach applies a broad set of principles of conduct which are then implemented
by regulated institutions in the way they see fits best with their organisation. Supervision is based on
how the principles are implemented and the outcomes achieved.

76
Q

What is a Relationship Based Approach to Regulation?

A

Due to the number of firms for which a regulator may be responsible, the regulator must consider how
to align its resources with the risks each firm may pose to market stability. Where its risk assessments
indicate that a firm may pose a risk to the regulator’s objectives, the regulator may assign particular staff
members to have an ongoing direct relationship with the firm.

77
Q

How many principles of Securities Regulation has IOSCO designed?

A

38, subdivided into 10 categories

78
Q

What are the 8 IOSCO principles which apply to Regulators?

A
  1. The responsibilities of the regulator should be clear and objectively stated.
  2. The regulator should be operationally independent and accountable in the exercise of its functions
    and powers.
  3. The regulator should have adequate powers, proper resources and the capacity to perform its
    functions and exercise its powers.
  4. The regulator should adopt clear and consistent regulatory processes.
  5. The staff of the regulator should observe the highest professional standards including appropriate
    standards of confidentiality.
  6. The regulator should have or contribute to a process to monitor, mitigate and manage systemic risk,
    appropriate to its mandate.
  7. The regulator should have or contribute to a process to review the perimeter of regulation regularly.
  8. The regulator should seek to ensure that conflicts of interest and misalignment of incentives are
    avoided, eliminated, disclosed or otherwise managed.
79
Q

What are the 4 core activities often subject to regulation?

A
  • banking activities (deposit taking)
  • investment activities
  • insurance activities, and
  • home finance activities.
80
Q

In the UK what must each company do for each regulated activity it intends to conduct?

A

For each of the activities the firm intends to perform, it has to obtain authorisation and identify the
types of specified investments it plans to offer.

Also, for each proposed activity, the firm must identify
the types of specified investments to which its regulated services will relate.

81
Q

What does IOSCO require of the Compliance Function?

A
  1. To monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures and
    procedures put in place and the actions taken to address any deficiencies in the firm’s compliance
    with its obligations.
  2. To advise and assist the relevant persons responsible for carrying out regulated activities to comply with the firm’s obligations under the regulatory system.
82
Q

What does IOSCO consider is required to allow a Compliance Function to properly fulfill its responsibilities?

A

• The compliance function must have the necessary authority, resources, expertise and access to all
relevant information.
• A compliance officer is appointed and must be responsible for the compliance function and for any
reporting as to compliance required by the regulator.
• The relevant persons involved in the compliance functions must not be involved in the performance
of the services or activities they monitor.
• The method of determining the remuneration of the relevant persons involved in the compliance
function must not compromise their objectivity and must not be likely to do so.

83
Q

What is a method by which Regulators in differnet jurisdictions might collaborate?

A

A memorandum of understanding (MoU) is one such mechanism that may be established between two
regulatory authorities. The two supervisors write the MoU to set out how they would each act where a
given need for oversight straddles their respective areas of responsibility.

84
Q

Under the EU’s Cross border Rules, what is the Home Supervisor vs the Host Supervisor?

A

The home supervisor (where the firm is domiciled) and the host supervisor (of the jurisdiction in which the firm is operating under an EU passport)

85
Q

What is a Supervisory College?

A

Given the size and reach of the EU cross-border activity of banks, a different approach has been
developed to enable the relevant regulators to work together in a manner more tailored to each specific
banking group. This approach is known as a supervisory college.

Rather than the simplistic approach of home and host state regulation, a supervisory college brings
together all the EU regulators relevant to the operations of a given banking group – and may include some non-EU regulators also – to agree a model of supervision that will satisfy the needs and objectives of each regulator.

86
Q

What are the objectives of Regulation?

A
  • increase in confidence and trust in financial markets, systems and products
  • establish an environment to encourage economic development and wealth creation
  • reduce the risk of market and system failures including their economic consequences
  • enhance consumer protection, giving them the reassurance they need to save and invest, and
  • reduce financial crime by ensuring financial systems cannot easily be exploited.
87
Q

How do regulators manage the relationship of firms under their remit?

A

Base level of intensity depends on Impact and probability scores

88
Q

What is the punishment for defrauding securities investors under SOX?

A

25 years in prison

89
Q

What are the four forms of disciplinary action that exchange operators can take against any
person registered by the exchange?

A
  • a reprimand
  • a fine (usually within limits laid down/agreed by the exchange)
  • suspension of the member, or
  • expulsion of the member or trading representative.
90
Q

Which types of regulator typically cover insurance markets and investment services at a national
level?

A

SROs

91
Q

What four categories can UK-regulated activities be split into?

A
  • banking activities
  • investment activities
  • insurance activities, and
  • home finance activities.
92
Q

What is the punishment under SOX for CEOs knowingly signing a false declaration?

A

Up to USD 5 million fine and 20 years in prison

93
Q

What is the punishment under SOX for obstruction of justice?

A

Up to 20 years in prison

Global Financial Compliance (5 decks)

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